Too early to predict impact of Coronavirus on economy

​​​​​Today's news headlines:

  • ‘French economy shrinks as strikes and protests take their toll’ – Following a spate of strikes and protests, the French economy shrunk in Q4 for the first time under the leadership of Emmanuel Macron. This has cast doubts over the likelihood of a Eurozone growth rebound as soon as analysts had hoped for. The French finance minister, Bruno Le Maire, said that the weaker than expected data reflected disruptions to ports, railways and fuel distribution but welcomed resilience in consumer spending and business investment. (Financial Times)
  • ‘Gove warns UK business of trade frictions with EU’ – UK businesses have been warned that there will be increased probability of friction at borders with the EU that could affect some sectors. Divergence from EU rules and regulations could be important for businesses that rely heavily on free trade and matched product standards. The UK will be pushing for a Canada-style trade agreement with the EU, but some executives fear that a failure to make progress by late summer could raise the odds of new tariffs or regulatory hurdles at the end of the year. (Financial Times)

Fantastical beasts and where to find them

The ongoing Coronavirus saga seems to be getting worse, and the market is prematurely predicting dire pandemic-types of outcomes to global growth. Since the start of the year, the number of cases in China has risen to nearly 10,000 individuals infected and over 200 dead. Last night, the World Health Organisation (WHO) declared Coronavirus as an international health emergency, but at the same time praised the speed and scale of Chinese efforts to manage the outbreak, including building a hospital in 10 days. Thames Water have shut my road in south London for 6 months and the only thing they’ve managed to accomplish is extra traffic; China is delivering with their response.

Even so, most countries have issued travel warnings and recalled any nationals living in China. This morning, Bloomberg printed a very interesting piece describing China’s position as largest exporter of intermediate manufactured goods, highlighting the risk to the very fragile global manufacturing turn around.

According to Warwick McKibbin, Professor of Economics from Australian National University, the crisis might eventually cost the world economy 120-160 billion USD. Bloomberg Economics says the disease might bring China’s 2020 GDP from 6.0% to 4.5%. With respect, these seem like dramatic projections at this early stage of this story. We prefer the central bank approach adopted by the Fed and Bank of England; we will reserve judgement until there is more evidence of escalation, rather than contemplating worst-case scenarios too soon.

Bottom Line: It is frustrating that yet another issue has sprung up which might undermine the budding global economic rebound, but it is too soon to say what the impact might be. The WHO’s assessment of Chinese efforts is certainly encouraging, perhaps a little more patience is required before doom is inevitable. In the meantime, economic releases continue to point to a slow recovery in Q4. Next week’s Purchasing Manager Index data will be key to interpreting the evolution of business sentiment heading into 2020.


We saw some two-way price action in Sterling through yesterday, with the index falling around the London open, as rate markets increased bets that the Bank of England would lower interest rates. This gave way to a sharp move higher just before the BoE announcement at 12pm, as the cross moved towards the 1.31 level. The Pound buying continued overnight following subdued Advance US GDP data. This morning, we’re trading well above 1.31 at interbank level, with only some medium tier US data to come later.


Sterling’s trade weighted index has continued its bullish run this morning following yesterday’s moderately hawkish BoE meeting. Disappointing French growth data and German retail sales figures have contributed to increased selling pressure on the single currency. On the upside, we’d expect to see the next level of resistance around the 1.20 level whilst the Pound should be well supported above the 1.18 figure.


Despite a moderate increase against the Greenback yesterday, the Euro has begun this morning on a softer note. Fears over the prospects of a Euro area rebound should contribute to further downside moves for the pair throughout the day. We’re watching for a meaningful break below the 1.10 handle which could bring into play October’s lows of 1.0879.